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Natural resource economies – definition, subject matter and scope
Natural resource economics deals with the supply, demand and allocation of
the earth natural resource. Main objective of natural resource economics is to better
understand the role of natural resources in the economy in order to develop more
sustainable methods of managing those resources to ensure their availability to future
generations. Resource economists study interactions between economic and natural
systems, with the goal of developing a sustainable and efficient economy. It is a multi disciplinary field of academic research.
Natural resource management
Natural resource management refers to the management of natural resource
such as land, water, soil, plants and animals with a particular focus on how
management affects the quality of life for both present and future generations. Natural
resource management deals brings together land use planning, water management,
biodiversity conservation and the future sustainability of industries like agriculture,
mining, fishing, etc.
Environmental and Ecological Economics
The insights into sustainability provided by mainstream economics are taken much
further by environmental and ecological economists. The main areas of contribution
include the following:
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A classification of sustainability views according to assumptions about the
conservation of natural resources
Extending the analysis of externalities to provide a basis for designing antipollution policies and deciding on the resources it is desirable to devote to
avoiding pollution
A range of methodologies for evaluating the services provided by
environmental assets and social capital to extend the inclusiveness of Cost
Benefit Analysis.
Models for projecting the pricing and depletion of finite resources.
Assessments of the implications of various access regimes governing the
harvesting of renewable resources
There is considerable overlap in the subject matter of ecological and environmental
economics. The key difference is one of orientation.
Environmental economics tends to embrace the Neo-classical paradigm as an
analysis of the economic system and seeks to incorporate environmental assets and
services.
Ecological economics gives priority to the health of complex interrelated ecological
systems and consider how economic behaviour can be modified to that end.
Natural resources classification and characteristics:
Natural resources are often classified into renewable and non-renewable
resources.
Renewable resources: Renewable resources are generally living resources (fish,
coffee, and forests, for example), which can restock (renew).
Non- renewable natural resources: Non-living renewable natural resources include
soil, as well as water, wind, tides and solar radiation, etc
Resources can also be classified on the basis of their origin i.e. biotic and abiotic.
Biotic resources: Biotic resources are derived from animals and plants (i.e-the living
world). Biotic is a living component of a community; for example organisms, such as
plants and animals.
Abiotic resources: Abiotic resources are derived from the non-living world e.g. land,
water, and air. Mineral and power resources are also abiotic resources some are
derived from nature. In biology and ecology, abiotic components are non-living
chemical and physical factors in the environment which affect ecosystems.
Natural resources:
Water resource: Water resources are usually renewable resources which naturally
recharge. Overexploitation occurs if a water resource is
extracted at a rate that
exceeds the recharge rate, that is, at a rate that exceeds the practical sustained yield.
Forest resources: Forest is overexploited when they are logged at a rate faster than
reforestation takes place. Reforestation competes with other land uses such as food
production, livestock grazing, and living space for further economic growth.
Deforestation
Deforestation is the removal of a forest or stand of trees where the land is
thereafter
converted to a non-forest use. Examples of deforestation include
conversion of forestland to farms, ranches, or urban use. The term deforestation is
often misused to describe any activity where all trees in an area are removed.
However in temperate climates, the removal of all trees in an area—in conformance
with sustainable forestry practices—is correctly described as regeneration harvest. In
temperate climates, natural regeneration of forest stands often will not occur in the
absence of disturbance, whether natural or anthropogenic. Furthermore, biodiversity
after regeneration harvest often mimics that found after natural disturbance, including
biodiversity loss after naturally occurring rainforest destruction.
Resources characteristics: Resources have three main characteristics namely
1) Utility,
2) Limited availability,
3) Potential for depletion or consumption.
In economics, utility is a measure of satisfaction, referring to the total
satisfaction received by a consumer from consuming a good or service
Scarcity
Scarcity is the fundamental economic problem of having humans who have
unlimited wants and needs in a world of limited resources. It states that society has
insufficient productive resources to fulfill all human wants and needs.
Resource depletion
Resource depletion is an economic term referring to the exhaustion of raw materials
within a region. Resource depletion is most commonly used in reference to farming,
fishing, mining, and fossil fuels.
Causes of resource depletion
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Over-consumption/excessive or unnecessary use of resources
Non-equitable distribution of resources
Overpopulation
Slash and burn agricultural practices, currently occurring in many developing
countries
Technological and industrial development
Erosion
Irrigation
Mining for oil and minerals
Aquifer depletion
Forestry
Pollution or contamination of resources
Natural resources are also categorized based on the stage of development:
Potential Resources are known to exist and may be used in the future. For
example, petroleum may exist in many parts of India and Kuwait that have
sedimentary rocks, but until the time it is actually drilled out and put into use, it
remains a potential resource.
Actual resources are those that have been surveyed, their quantity and quality
determined, and are being used in present times. For example, petroleum and
natural gas is actively being obtained from the Mumbai High Fields. That part of
the actual resource that can be developed profitably with available technology is
called a reserve resource, while that part that cannot be developed profitably
because of lack of technology is called a stock resource.
Management of renewable and non-renewable resources
A natural resource may exist as a separate entity such as fresh water, and air,
as well as a living organism such as a fish, or it may exist in an alternate form which
must be processed to obtain the resource such as metal ores, oil, and most forms of
energy
Renewable resource
Renewable resource is a natural resource which can replenish with the
passage of time, either through biological reproduction or other naturally recurring
processes. Renewable resources are a part of Earth's natural environment and the
largest components of its ecosphere. A positive life cycle assessment is a key
indicator of a resource's sustainability. Renewable resources may be the source of
power for renewable energy. Sustainable harvesting of renewable resources (i.e.,
maintaining a positive renewal rate) can reduce air pollution, soil contamination,
habitat destruction and land degradation.
Non-renewable resource
Non-renewable resource is also known as a finite resource and is a resource
that does not renew itself at a sufficient rate for sustainable economic extraction in
meaningful human time-frames. An example is carbon-based, organically-derived fuel.
The original organic material, with the aid of heat and pressure, becomes a fuel such
as oil or gas. Fossil fuels (such as coal, petroleum, and natural gas), and certain
aquifers are all non-renewable resources. David Ricardo in his early works analysed
the pricing of exhaustible resources, where he argued that the price of a mineral
resource should increase over time. He argued that the spot price is always
determined by the mine with the highest cost of extraction, and mine owners with
lower extraction costs benefit from a differential rent.
Carrying capacity
Use of natural resource services is compared with defined bio-physical limits for
the supply of such services.
Economic Approaches to Resource Management
In economics approaches to resource management, the common
denominator is typically some form of measurement that can be related to individual
welfare. Economics provides a comprehensive framework for analysing most aspects
of natural resource and environmental issues. Optimal extraction and use of nonrenewable resources, in particular as analysed by the Hotelling’s rule. Economic
indicators of sustainability derived from the weak sustainability view that the total
amount of capital must be maintained. The basic Hotelling Rule is based on a number
of simplifying assumptions. The total stock of resources is assumed to be known and
of equal quality, and all the market players are assumed to have full knowledge. The
concept of management of non-renewable resources is mainly concerned with how a
resource stock should be used optimally and not concerned with sustainability.
Major issues in use of natural resources – productivity, equity &sustainability
Sustainability:
The word sustainability is derived from the Latin sustinere (tenere, to hold; sus,
up). The most widely quoted definition of sustainability and sustainable development,
that of the Brundtland Commission of the United Nations on March 20, 1987:
“sustainable development is development that meets the needs of the present without
compromising the ability of future generations to meet their own needs.
Environmental, social and economic demands - the "three pillars" of sustainability.
The word sustainability is applied not only to human sustainability on earth, but too
many situations and contexts over many scales of space and time, from small local
ones to the global balance of production and consumption. Sustainability is the
capacity to endure.
In ecology, sustainability describes how biological systems remain diverse and
productive over time, a necessary precondition for human well-being. Long-lived and
healthy wetlands and forests are examples of sustainable biological systems.
Sustainability farming: It is the system that in which NRS are managed so that
the potential yield and stock of NRS do not decline over time
Principles and concepts
The philosophical and analytic framework of sustainability draws on and
connects with many different disciplines and fields. In recent years an area that
has come to be called sustainability science has emerged. Sustainability science is
not yet an autonomous field or discipline of its own, and has tended to be problemdriven and oriented towards guiding decision-making.
Scale and context
Sustainability is studied and managed over many scales (levels or frames of
reference) of time and space and in many contexts of environmental, social and
economic organization.
Consumption — population, technology, resources
The total environmental impact of a community or of humankind as a whole
depends both on population and impact per person, which in turn depends in
complex ways on what resources are being used, whether or not those resources
are renewable and the scale of the human activity relative to the carrying capacity
of the ecosystems involved.
To express human impact mathematically called as I PAT formula. This
formulation attempts to explain human consumption in terms of three components:
population numbers, levels of consumption and impact per unit of resource use,
which is termed technology used.
The equation is expressed:
I=P×A×T
Where: I = Environmental impact,
P = Population,
A = Affluence,
T = Technology
Measurement
Sustainability measurement is a term that denotes the measurements used as
the quantitative basis for the informed management of sustainability. The metrics
used for the measurement of sustainability (involving the sustainability of
environmental, social and economic domains are evolving: they include indicators,
benchmarks, audits, sustainability standards and certification systems.
Resource productivity:
Resource productivity is the quantity of good or service (outcome) that is
obtained through the expenditure of unit resource. This can be expressed in
monetary terms as the monetary yield per unit resource.
Resource productivity and resource intensity are key concepts used in
sustainability measurement. The sustainability objective is to maximize resource
productivity while minimizing resource intensity
List of environmental issues
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Climate change
Conservation
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Energy Environmental degradation
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Environmental health
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Intensive farming
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Land degradation —
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Soil
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Land use
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Overpopulation
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Ozone depletion
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Pollution
Water pollution
Air pollution
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Reservoirs Resource depletion
Equity and issues in equity of natural resources
Equity derives from a concept of social justice. It represents a belief that there are
some things which people should have, that there are basic needs that should be
fulfilled, and that policy should be directed with impartiality, fairness and justice
towards these ends .Equity means that there should be a minimum level of income
and environmental quality below which nobody falls.
Intra-generational equity
Equity can also be applied across communities and nations within one
generation. The reason that intra-generational equity is a key principle of sustainable
development is that inequities are a cause of environmental degradation. Poverty
deprives people of the choice about whether or not to be environmentally sound in
their activities.
Equity issues, key parameters and indicators:
Key parameters and indicators
First, the majority of people would be deprived in terms of low welfare level despite
their hard work (equity failure),
Second, unfair access to public infrastructure, facilities and services could occur
(equity failure). i.e . Failure to guarantee intra- and inter-generational equity would
cause deep inequality and un sustainability
Third, natural resources may be so exploited that threaten their sustainability of use.
Fourth, negative externalities of economic activities could create serious threat to the
environment
Equity issues:
Nine Equity Issues are
1. Income and employment system
2. Access to facilities and services
3. Access to natural resources
4. Fairness in competition
5. Natural resource exploitation
6. Negative
egative externalities
7. Non-production
production function
8. Compensation
ompensation to worse
worse-off people
9. Sustainability
ustainability reinvestment
Discount rate
Discounted cash flow (DCF)
(
) analysis is a method of valuing a project, or asset
using the concepts of the time value of money.
money All future cash flows are estimated and
discounted to give their present values (PVs). The discount rate reflects two things:
1. The time value of money
2. A risk premium .
Discrete cash flows
Discounted
nted present value is expressed as:
where
DPV is the discounted present value of the future cash flow ((FV), or FV
adjusted for the delay in receipt;
i is the interest rate, which reflects the cost of tying up capital.
d is the discount rate which is i/(1+i),
), i.e. the interest rate expressed as a
deduction at the beginning of the year instead of an addition at the end of
the year; and n is the time in years before the future cash flow occurs.
Continuous cash flows
For continuous cash flows, the summation in the above formula is replaced by
an integration:
where FV(t)) is now the rate of cash flow, and
= log(1+i).
log(1+
Discounting
In order to compare costs and benefits at different points in time, we use the technique
of discounting, in order to calculate present discounted value. The formula for present
discounted value is given by
X
PV = -----------(1+R)t
where
PV = present value
X = value to be received or paid in the future
t = number of years until the receipt or payment
R = "discount rate"
Why discount?
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opportunity cost of capital
productivity of capital
time preference in consumption
impatience
future generations may be better off.
Opportunity cost.
When markets do not exist
Environmental goods and services often are not traded in markets, e.g., clean
air.
Types of Economic Analysis
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Cost-benefit analysis
− Identify and quantifying project impacts
− Monetization
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− Damage assessment
Economic impact analysis
Cost-effectiveness
effectiveness analysis
Supply and Demand
Supply and Demand
Price
P*
Supply
Consumer Surplus
Equilibrium price and quantity
Producer Surplus
Demand
Q*
Quantity
Social rate of discount It is use estimating rate of discount for the following factors
1) Determining the depletion rate of non
non-renewable resources.
2) Determining the optimal rate of saving for nations.
3) Calculating social opportunity cost of public funds utilised in a multitude of
purposes.
4) Calculating cost-benefit
benefit analysis.
Calculation
The SDR can be calculated by
where r equals the SDR and t equals time. For benefits or costs that have no end it
is just
A higher SDR makes it less likely a social project will be funded. A higher SDR implies
greater risks to the assumption that the benefits of the project will be reaped
reaped.
Differences between private and social discount rate
There are a number of qualitative differences between social and private
discount rates and evaluation of projects associated with them. The governance of
social project funding is different naturally,
naturally, because estimating the benefits of social
projects requires making ethically subtle choices about the benefits to others.
II - The Social time preference rate
Another school of economists believes that the correct rate of discount for
public projects is the social time preference rate, STPR, which is also called the
consumption rate of interest (CRI). The rationale for this argument is quite simple; the
purpose behind investment decisions is to increase future consumption, which
involves a sacrifice on
n present consumption. Therefore, what we need to do is
ascertain the net consumption stream of an investment project and then use the CRI.
Market efficiency, externalities and types
Market efficiency
Efficiency of the market is measured as output- input ratio. It should be greater
than one.
E
=
O/I
Types of market efficiency
Allocative efficiency :
This is a type of efficiency in which economy/producers produce only that type
of goods and services which are more desirable in the society and also in high
demand. According to the formula the point of allocative efficiency is a point where
price is equal to Marginal cost (P=MC).
Pareto efficiency, or Pareto optimality:
It is a concept in economics. The term is named after Vilfredo Pareto, an Italian
economist who used the concept in his studies of economic efficiency and income
distribution. Given an initial allocation of goods among a set of individuals, a change to
a different allocation that makes at least one individual better off without making any
other individual worse off is called a Pareto improvement.
Productive efficiency (also technical efficiency):
Occurs when the economy is utilizing all of its resources efficiently, producing
most output from least input. The concept is illustrated on a production possibility
frontier (PPF). In long-run equilibrium for perfectly competitive markets, the average
(total) cost curve i.e. where MC = A(T)C.
Productive efficiency:
Productive efficiency requires that all firms operate using best-practice
technological and managerial processes. By improving these processes, an economy
or business can extend its production possibility frontier outward and increase
efficiency further.
Economic efficiency:
Economic efficiency occurs at the level of output at which the marginal social
benefits (MSB) equal the marginal social costs (MSC). MSB = MSC
Market efficiency levels
1. Weak-form efficiency: Prices of the securities instantly and fully reflect all
information of the past prices. This means future price movements cannot be
predicted by using past prices.
2. Semi-strong efficiency: Asset prices fully reflect all of the publicly available
information. Therefore, only investors with additional inside information could
have advantage on the market.
3. Strong-form efficiency: Asset prices fully reflect all of the public and inside
information available. Therefore, no one can have advantage on the market in
predicting prices since there is no data that would
Market failure:
Market failure is a concept within economic theory wherein the allocation of
goods and services by a free market is not efficient. That is, there exists another
conceivable outcome where a market participant may be made better-off without
making someone else
Market power, Monopoly, Monopsony, Oligopoly, and Oligopsony
The inefficiency in the market lead to imperfect competition and causes market
failure. Agents in a market can gain market power, allowing them to block other
mutually beneficial gains from trades from occurring. This can lead to inefficiency due
to imperfect competition, which can take many different forms, such as monopolies,
cartels, or monopolistic competition, if the agent does not implement perfect price
discrimination. In a monopoly, the market equilibrium will no longer be Pareto optimal.
The monopoly will use its market power to restrict output below the quantity at which
the marginal social benefit is equal to the marginal social cost of the last unit
produced, so as to keep prices and profits high.
Public goods
Some markets can fail due to the nature of certain goods, or the nature of their
exchange. For instance, goods can display the attributes of public goods or commonpool resources, while markets may have significant transaction costs or informational
asymmetry. In general, all of these situations can produce inefficiency, and a resulting
market failure. This can cause underinvestment, such as where a researcher cannot
capture enough of the benefits from success to make the research effort worthwhile.
Property right as right of control
This is the underlying cause of market failure. A market is an institution in which
individuals or firms exchange not just commodities, but the rights to use them in
particular ways for particular amounts of time. Markets are institutions which organize
the exchange of control of commodities, where the nature of the control is defined by
the property rights attached to the commodities. This falls into two generalized rights –
excludability and transferability.
Excludability:
Deals with the ability of agents to control who uses their commodity, and for
how long – and the related costs associated with doing so.
Transferability:
It reflects the right of agents to transfer the rights of use from one agent to
another, for instance by selling or leasing a commodity, and the costs associated with
doing so. If a given system of rights does not fully guarantee these at minimal (or no)
cost, then the resulting distribution can be inefficient.
Externalities:
The allocation of resources to productive uses results from consumers and
producers making decisions with the aim of maximizing satisfaction and profits,
respectively. Private costs and benefits are taken into account in deciding purchases
and organizing production. Social costs and benefits include the costs and benefits of
consumer and producer but also costs borne by those who are not participating in that
particular market. These are known as external costs and benefits or externalities.
External costs and benefits can arise through both consumption and production. From
a sustainable development perspective, external costs are most significant and
arguably account for the failure of individuals, communities and nations to follow a
sustainable path.
Externalities types:
Negative Externalities: When economic agents not directly involved, negative
externalities can exist, such as pollution.
Positive Externalities:
Positive externalities in production means that social cost is
less than private cost, and more of the good should be produced than will occur in a
free market.
Efficient market: A market is said to be efficient if marginal price and marginal cost
are equal. If not then a market is failure.
External costs
The shows the negative effects of a externality. i e pollution of industry.
External benefits
This shows the positive or beneficial effects of a externality. For example, the
industry supplying smallpox vaccinations is assumed to be selling in a competitive
market.
Market failure - externalities
Common resources
Externalities are third party effects arising from production and consumption of
goods and services for which no appropriate compensation is paid. One of the major
problems facing the environment is that common resources such as fish stocks and
grazing land are not privately owned – commonly owned resources may lack the
protection of property rights and are susceptible to over-exploitation because the
marginal cost of extracting the resource for a private agent is close to zero.
When there are environmental externalities, the private equilibrium price and
quantity determined by the interaction of market supply and demand is not the same
as the social equilibrium which includes all internal and external costs.
In a free market, a producer will have little direct incentive to control pollution because
it is external – i.e. the profit-maximising supplier considers only his/her own private
costs and benefits.
Externalities and Market Failure
When there is a harmful production externality, the production of a good imposes
external costs. The marginal social costs exceed marginal private costs by the amount
of the external costs. When choosing how much to produce, firms are only concerned
with their own costs, the marginal private costs (MPC). The market supply curve is the
MPC curve.
Policies for Externalities
Regulation
Taxes/subsidies
Pollution permits
Market imperfections and natural resources
Definition: Imperfect competition is a competitive market situation where there are
many sellers, but they are selling heterogeneous (dissimilar) goods as opposed to the
perfect competitive market scenario.
Market imperfection can be defined as anything that interferes with trade. This
includes two dimensions of imperfections. First, imperfections cause a rational market
participant to deviate from holding the market portfolio. Second, imperfections cause a
rational market participant to deviate from his preferred risk level. Market
imperfections generate costs which interfere with trades that rational individuals make
or would make in the absence of the imperfection. According to Hymer, market
imperfections are structural, arising from structural deviations from perfect competition
in the final product market due to exclusive and permanent control of proprietary
technology, privileged access to inputs, scale economies, control of distribution
systems, and product differentiation, but in their absence markets are perfectly
efficient.
The persistence of imperfect information across markets has contributed
significantly to unsustainable production and consumption patterns. On the other
hand, our examples illustrate how innovative entrepreneurs can develop solutions that
help lead markets towards sustainability. As the collective knowledge of environmental
degradation caused by unsustainable practices continues to grow, we are likely to see
increasing pressure from policy makers, consumer groups, environmental activists,
employees and others for firms to introduce innovative solutions to these problems in
the hopes of stopping or even reversing environmental degradation patterns.
In imperfect competition buyer has to pay higher prices for resources to acquire
additional resource (say land). In this case marginal resource cost (MRC) of resource
is equal to price and not to the additional cost.MRC is the increase in the total cost of
land from buying an additional unit of resource ( say land).
Equilibrium price in these case p2 > p1 and equilibrium quantity is Q1 < Q2
In imperfect market the resource owner charge higher proices and supplied less
quantity than in perfect market where price = quantity
Equilibrium in imperfect market for resource ( say land).
Market and non market valuation of natural resources.
The economic value of natural resources can be estimated by the price
individuals will pay in order to obtain the benefits of the resources. The non-market
values of that communities attach to natural resources, such as recreational, existence
and protection values. To support efficient decision making, environmental valuation
techniques are needed to quantify the value impacts resulting from changed
catchment management. Several approaches to environmental valuation are there i.e.
revealed preference techniques include travel cost and hedonic pricing methods,
stated preference techniques include contingent valuation and choice experiments.
Stated preference techniques are increasingly being used to estimate non-market
values. Nonmarket valuation is a method to estimate the value of goods and services
that are not commonly bought and sold in markets.
Non-market valuation is a sub-field within environmental economics that deals with
theoretical and practical aspects of estimating monetary values on non-marketed
environmental goods and services. Specifically, techniques include the travel cost
method of recreational demand, the hedonic property pricing model, averting behavior
analysis,
contingent
valuation,
contingent
rating/ranking,
and
stated
choice
experiments.
Benefit-cost analysis
Benefit-cost analysis is a systematic method that compares the accumulative
social benefits with the opportunity costs. Benefit-cost analysis can be more difficult to
apply when the benefits or cost do not have a market value.
Travel Cost Model
The travel cost model estimates the implicit price of natural resources based on
outlays of time and travel expenses. An evaluation of these costs incurred in using a
natural resource (e.g. a state park) can be used to estimate the regional demand for
the resource. The aggregate value of the resource can then be inferred from a
combination of this demand and the number of visits to the site over time. This model
can be applied to many recreational activities that utilize the more intangible natural
resources such as bird watching.
Random Utility Models
The random utility model is similar to the travel cost model except that rather
than focusing on the number and overall costs of trips to different sites, it estimates
the value individuals place on particular sites based on the attributes of the site.
Hedonic Pricing Methods
Hedonic pricing methods involve a comparison of specific sites that differ only
by some environmental attribute such as proximity to a forested area or availability of
a view. Comparison of the property value between two house sites provides an
indication of the value to the individual paying a higher price for the site with the
preferred attribute.
Contingent Valuation Method
The contingent valuation method is a survey- or questionnaire-based approach
to estimating the value of non-market goods. This is the primary method used for
placing value on resources that cannot be valued by the indirect methods. This is the
only method that can be used to estimate "existence values".
Existence value:
This is the value that individuals place on natural resources that they want to
remain unaltered, even though they may not use or visit the area.
Economic value:
It is one ways to measure the value of a resource. Economic values are useful
to consider when making economic choices – tradeoffs in allocating resources.
Measures of economic value are based on individual preferences
Valuation:
Ecological and Environmental Economics
Habitat : Opportunity cost approach, Replacement cost approach, Land Value
approach &
Contingent Valuation Approach
Air and water quality: Cost effectiveness of prevention, Preventive expenditure,
Replacement - reallocation costs, etc
Recreational: Travel Cost Approach and Contingent Valuation Approach.
Aesthetics, biodiversity, cultural, historical assets: Contingent Valuation Approach
Use Values (i.e., personal use):
Use Values are divided into market and non-market commodities:
a. Market commodities are those which are traded in competitive cash markets.
Private timber is a good natural resource example of a market commodity.
b. Non market commodities involve public goods, open access or unique
resources potentially constituting natural monopoly situations.
ii) option value: willingness to pay by a person to guarantee that a resource
would be available should he/she choose to use it in the future.
2. Non Use Values:
i) Bequest value: WTP by a person so that a resource might be passed on to future
generations.
ii) Existence value: WTP by a person so that a resource will continue to exist today
even if he/she never uses the resource. There is no personal use.
Common methods for estimating prices for publicly provided natural resources:
A. Market or Quasi-Market Methods of Price Estimation:
1. Competitive market transaction data - Competitive price information from actual
private market transactions as a basis for valuation. i.e. Private market annual
timber sales data is good example of market transaction data.
2. Residual valuation - used in situations where private markets for natural resources
may not be active.
3. Change in net income - The general idea behind this pricing method is to estimate
what the natural resource contributes to producer’s profits (net income),
B. Non-Market and Non-use Methods:
1. Travel cost method (TCM):
It is most widely-used method for determining the demand WTP for outdoor
recreation sites. It is a revealed preference method. TCM was first suggested by
Hotelling and later Clawson, and has since been used extensively to estimate demand
for recreation sites.
1) Hedonic TCM
Define Hedonic method - the Hedonic price method is used to estimate the value of
an attribute (e.g., site quality) of a good (e.g., recreation site). In other words, the
hedonic model, the multiple regressions, decomposes the total value of the good into
the value of its several attributes.
2) Random Utility Models
RUMs are used to measure the economic impacts of changes in recreation
site quality. It is a type of TCM.
RUMs use the form of a multinomial logistical
regression model (i.e., logit model) where the predicted dependent variable (i.e.,
probability of visit given values of independent variables) is restricted to lie between
the unit interval, 0 to 1.
3. Contingent valuation method
Many important valuation problems are non-observable; i.e., no value measures
can be derived from observing individual choices in a market. Some of these
situations involve potential rather than actual policy changes. Such cases call for
value measurement methods which use hypothetical, constructed markets.